The Reserve Bank of India had some unusual visitors a week ago. Officials from the tax deducted at source (TDS) wing of the income tax department visited the Reserve Bank of India (RBI) headquarters to inquire into the latters failure to deduct tax at source since July 2007 on payments amounting to more than Rs800 crore.

The department claimed that according to income tax (I-T) rules, the RBI should have deducted TDS at the rate of 10% on this amount, which comes to more than Rs80 crore. After deduction, RBI should have deposited the TDS with the I-T department by the 7th of the month after the one it was deducted for.

The I-T authorities found that the RBI had made payments to some government banks as agency commission but failed to deduct TDS on it. The commission was paid for banking and government business conducted by these banks on behalf of the RBI.

The department is considering levying 100% penalty (on the TDS amount) on the RBI for not complying with TDS laws. Officers at Aaykar Bhavan, the head office of the I-T department, said the inquiry was conducted because the department believed that the TDS needed to be deducted on payments made by the RBI as agency commission under section 194H of the Income Tax Act.

The RBI, in its defence, cited a circular issued by the Central Board of Direct Taxes (CBDT) in 2003, which said that no TDS was required to be deducted on turnover commission paid by RBI to agency banks.

The I-T department contended that agency commission and turnover commission are different and the circular was in force only until 2006. The department will not ask the RBI to pay the TDS because it will recover that from the banks.